La Fayette - Glossary

Also called Asset Backed Security, it describes finance structures where the underlying obligation and the source of interest and capital repayment is generated from the cash flow from a particular financial asset or pool of assets.

Measures the value that an investment manager adds by comparing the difference between a portfolio�s risk-adjusted return and the return of the benchmark for that portfolio.

The annualized or average annual return is calculated by adding each year's return on investment and dividing that number by the number of years invested. The return takes into account the reinvestment of dividends as well as the change in the price of the investment over time.

A strategy that aims to exploit price differentials that arise from market inefficiencies. By extension, arbitrage designates any type of relative value trade which typically involve purchasing a security perceived as undervalued, relative to another instrument with similar characteristics that is sold short.

An investment strategy seeking to identify specific investments that will produce performance, rather than assessing the influence that macro-economic factors will have on returns.

Corporate debt instruments with an option or warrant component attached, allowing the investor to either hold the bond to maturity or convert the bond into predetermined amount of equity in the company.

Measures the relationship between the fund performance and the performance of another fund or benchmark index over a common time period.

A positive correlation coefficient means that as the returns of one asset increase, the returns of the other asset increase and vice versa.

A negative correlation indicates that when one asset has positive returns, the other one has negative returns.

The higher the absolute value of the correlation, the stronger the relationship.

A correlation close to zero implies the absence of a stable relationship.

The securities of companies that are experiencing financial or operational difficulties. Distressed situations include reorganizations, bankruptcies, distressed sales, and other corporate restructuring.

Peak to trough decline of an investment record over a given time period and which is expressed as a percentage. The maximum drawdown is the worst possible loss an investor could have suffered over that period, should he have invested at the top and redeemed at the bottom.

Investments focusing on specific high-growth sectors or equity types (e.g.: healthcare, technology stocks, small cap)

Investments focusing on specific high-growth sectors or equity types (e.g.: healthcare, technology stocks, small cap) or the economies of developing countries.

Long only equity investments based on traditional style fundamental often value-oriented research.

Returns are driven by events rather than market trends. Investments may include private equity, risk arbitrage, real estate and distressed securities, among others.

Investments in debt instruments employing both a long and short strategy.

Investments in debt instruments which use a long only strategy.

An approach that relies on valuing stocks by examining companies' financials and operations, including sales, earnings, growth potential, asset size and quality, indebtedness, management, products and competition. Managers can have a growth or a value style.

The purchase or sale of a security or a derivative security (such as options or futures) in order to reduce or eliminate risk associated with undesirable price changes of another security.

A performance fee term which refers to investors in a fund or fund of funds not paying twice for the same performance uplift, whereby the NAV has to appreciate above the highest NAV of any previous period before being applied.

Measures whether a variable�s probability distribution is peaked or flat relative to a normal distribution. Normal distributions have a kurtosis of 3.

Distributions with a kurtosis higher than 3 are peaked at the centre (the mean) and have fat tails.

Distributions with a kurtosis lower than 3 are less peaked and have thinner tails.

Fat tails represents extreme or abnormal returns. Therefore, a high kurtosis indicates a fund tends to have extreme returns, whether they are positive or negative.

The practice of borrowing to add to an investment position when one believes that the return from the position will exceed the cost of the borrowed fund. Both companies and investors can use leverage. A company that takes on more debt than its ability to generate cash warrants is said to be overleveraged.

Investing in the classic "hedge" style. Typically, portfolios with long equity and/or option positions hedged with short equity and/or option positions, profiting primarily from stock selection.

Active traders, typically investing globally, seeking profit from changes in global economies. Portfolios turn frequently, use leverage and may take positions in stocks, bonds, currencies, derivatives and other financial instruments.

Pricing disparities caused by a lack of information about a market or company or by a distortion of the information that is available.

These funds attempt to hedge out most market risk by taking offsetting positions.

They can either match long and short positions on a dollar-, or a beta- basis, or use futures to hedge out the market risk they want to avoid (equity index moves, interest rate changes�). Market neutral funds derive no performance impact from the market rising or falling.

Using various investment strategies to simultaneously attain short and long-term gains. Allows manager to overweight or underweight strategies depending on current investment opportunities.

The market value on a given day of a fund share. NAV is calculated after the close of the exchanges on a valuation day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The number of shares outstanding can vary depending on the number of subscriptions and redemptions.

The net exposure of a fund (long or short) is computed by deducting the value of the short positions from the long positions (including leverage).

Fee typically taken by hedge funds based on their performance over a defined period of time.

Generally, shareholders may sell their shares at net asset value on the last business day of each month.

Measures a fund�s return relative to its risk. The higher the Sharpe ratio, the better the risk/reward offered by the fund.

Involves selling borrowed securities, which are perceived to trade at prices above perceived fair value. The fund manager sells �borrowed� securities in the expectation that they will be bought back at a later date at a lower price. In order to settle the initial sale, the shares are borrowed from an institution which is a long term holder of the shares.

Measures the degree of asymmetry of a distribution. A positive skewness means a distribution is skewed to the right, i.e. the right tail is higher than the left tail. This means there are more extreme positive returns than extreme negative ones. Positive skewness is enviable. A negative skewnness indicates a distribution is skewed to the left i.e. the left tail is higher than the right tail. A negative skewness combined with a high excess kurtosis implies there is a significant risk of high negative returns.

Annualized measure of the amount of return above the risk free rate per unit of downside risk. Downside risk adjusted return.
The sortino ratio (by risk-free) takes into account the risk associated with an investment yielding less than the risk-free rate.
A sortino ratio (by risk free) greater than 3.0 indicates a strong rate of return per downside deviation thus the returns are high in terms of their risk.

Measures how widely monthly rates of return are dispersed from the monthly arithmetic average. It is an annualized measure of variability (or volatility).

Systematic approach that uses mathematical models to identify patterns or trends in prices of financial instruments. The algorithms that determine when to buy or sell are computer-driven and proprietary.

An investment approach that seeks to assess the influence of various macro-and micro-economic factors before identifying individual investments.

�Value at Risk� is a measure of potential loss from an unlikely adverse event in a normal, everyday market environment. It is usually expressed as a percentage of the NAV over a specific time horizon with a certain confidence level.

The most common measure of risk in finance. Volatility is the extent to which the price of an asset changes over time. Mathematically, volatility is defined as the standard deviation about the mean.

The single investment rate that sets the present value of all a bond's future cash payments equal to the price of the bond.